Pros and Cons of Assuming a Mortgage

A mortgage assumption allows a buyer to take over the seller's existing mortgage loan, including the current balance, interest rate, and repayment terms. Since a lot of assumable loans are in place, offering interest rates lower than you can get now, or are ever likely to get at any point in the near future, this appears to be a very attractive option for both buyers and sellers. Why?

For buyers, the major upside is you can get a far lower rate than in the current market.

The downside for buyers is you can only assume the balance on the loan, so any equity the seller has in the property has to come out of your pocket in cash, since you cannot finance the equity, as you can with a new mortgage loan. So assuming a loan may require a much larger down payment than you were planning for.

For sellers, the upside is it makes your home easier to market since multiple purchasers may find your assumable mortgage a very attractive selling point. It may make a potential purchaser choose your house to make an offer on, and may tip the balance between two houses they are trying to decide between.

The downside for sellers (and buyers too) is that assumptions are processed by the servicer of the seller's mortgage, who are getting paid a small flat fee to do it, rather than a commission-based fee structure as with a new mortgage. This means the servicer has no incentive to make the process go smoothly or quickly for the parties involved. Keep in mind too that the servicer would rather that low-interest rate loan go away and be replaced with a much higher interest rate loan. So be prepared for an assumption to take much longer and be more of a hassle than a new mortgage loan.

To clarify, an assumptor is a person that assumes a loan, also known as an assumer. Let's dig into this a little deeper.

First, only FHA, VA, and USDA loans are assumable, basically all government-backed loans. Conventional loans are not assumable. So a seller with a conventional loan cannot market their home as having an assumable loan. But a seller with a conventional loan can buy a house with an assumable loan. Plan on the purchase of a house where you are assuming the loan taking longer than getting a new mortgage.

What is the process of mortgage assumption? Potential buyers and sellers should verify the assumability of a loan before proceeding. The buyer must be qualified for the mortgage, which involves a review of creditworthiness, similar to applying for a new mortgage. See below for assumptions that do not require credit-qualifying. Then a closing will take place, similar to a regular new loan.

Another big benefit to the buyer of a home where they are assuming the existing loan: the buyer should face fewer closing costs compared to those associated with getting a new home loan. This aspect could make the entire real estate transaction less costly and more appealing.

However, there are also risks associated with a mortgage assumption that need careful consideration. One primary concern for the seller is the potential liability they bear. If the buyer defaults, the lender may pursue payment from the original borrower unless the lender has explicitly released the original borrower from liability. The seller should make certain they are being released from liability on the loan their purchaser is assuming, and the assumption will make the loan zero out on their credit report. Even if the purchaser defaults on the loan, the servicer should not be able to go back to the seller if the assumption is done properly.

There is a misconception that it's inherently easier to assume a mortgage than getting a new mortgage. While the process might be streamlined in certain aspects, it still requires normal qualifying for the loan, based on your income, credit, and other debts. Be sure your purchaser, and their realtor, if they have one, understand that the purchaser has to fully qualify for the loan before it can close. However, the purchaser may qualify more easily at the lower interest rate on the loan they are assuming.

Some people that have gotten behind on their payments may think getting someone to assume the loan is a way out. But only mortgages that are not past due can be assumed. Some servicers may say the purchaser can bring the loan current when they close on the assumption, but most servicers will require the loan be current BEFORE they close an assumption.

If approved, the financing shifts from the seller to the buyer, who begins making payments under the original mortgage terms after a closing where title to the property is also transferred. A purchaser wanting to assume the mortgage on the house they are buying needs to prepare to be approved for their mortgage just as they would for a new mortgage. Go here for more information on this.

Experienced realtors advise testing the waters of the assumption market, particularly when homeowners face consistently higher interest rates. Check the servicer's reviews and testimonials to see if you can find any that talk about the process of assuming a loan with that servicer....if there are many negative reviews of the assumption process with that servicer, build in even more time if you decide to move forward. If the process begins to take a long time or you aren't getting good communication from the servicer, complain to the VA, FHA, or USDA (depending on what type of loan it is).

The path of mortgage assumption holds promise for strategic buyers and sellers. When approached with understanding and intent, a mortgage assumption can be well worth it for the purchaser in particular.

For Purchasers: Buying a Home and Assuming the Existing Mortgage

1) THE NUMBER ONE BENEFIT OF ASSUMING A MORTGAGE IS YOU WILL SAVE LITERALLY THOUSANDS, POTENTIALLY TENS OF THOUSANDS of dollars in mortgage interest.

2) THE NUMBER ONE DOWNSIDE IS THEY TAKE LONGER. Don't kid yourself about this. If you are selling a home and the purchasers need to close by a certain date, and you haven't closed on your assumption yet, it can cause a domino effect of stressful events: having to change moving dates, utilities and so forth. Be prepared for this and make sure all the transactions that depend on the assumption closing are not going to fall apart and/or have some flexibility if it doesn't close on time.

3) But back to the number one benefit! Long after the pain of getting it done has faded, you will be paying a much lower interest rate than you would have gotten. This is especially important to borrowers that are a bit challenged. You will not be charged a higher rate based on your credit score, as you would have if you got a brand new loan. You get the interest rate the seller has.

For Sellers: Marketing Your Home That Has an Assumable Loan

1) MAKE SURE you have an assumable loan on your house. If you have a conventional loan, it's not.

2) If you have any other type of mortgage, locate your closing documents. The Note and Security Deed/Mortgage/Deed of Trust (depending on your state) will say whether the loan is assumable or not.

3) Keep those documents handy and make copies of them for potential purchasers and their realtors, who will want to verify the loan is assumable.

4) The loan must be current to be assumed. Make sure to keep making the payments on time as the assumption process proceeds.

4) Go ahead and call your mortgage servicer. Ask for the assumption department. If they say they don't have one, ugh! That means they don't have resources focused on assumptions and things may not go as well. But it doesn't mean you can't let your loan be assumed. Ask for a checklist of items the purchaser will need to provide to the servicer to assume your loan.

5) Make packets of documents to include the Note, Mortgage, and list of documents the servicer wants from the assumptor that buyers can take when considering making an offer on your home.

5) Plan on the process taking longer than a normal closing. Build an extra 1 - 2 months into the process. An assumption of your loan will work better for you if you are not trying to close on another house immediately after the assumption closes.

6) If you have significant equity in your home, fewer people will be able to assume your loan since it will require such a large down payment.

Assumptions That DO NOT Require Credit-Qualifying

Believe it or don't, but there are some very specific scenarios where you don't have to qualify to assume a mortgage. If you are:

Getting divorced - there may be a non-qualifying option. For example, when a couple has a VA loan, if the Veteran gets the house in the divorce, the spouse can be dropped off the loan with just the divorce decree showing the Veteran was awarded the property and a Quit Claim Deed. The loan must not be past due.
The widow/widower of a borrower - If one borrower has passed away, even if a couple wasn't married, the partner/spouse may be able to assume the loan without qualifying. On a VA loan, another family member/caregiver for the Veteran can take over the payments without qualifying, as long as you continue to make the payments on time. Inquire with the servicer and keep making the payments.

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